Forex Exclusive

Forex Exclusive

Syed Nabeel Iqbal
Manager Marketing
Khanani & Kalia International (Pvt.) Ltd.

First ISO 9001 Certified Exchange Company In Pakistan




Rupee on a downhill ride in the current fiscal
An overview of rupee’s depreciation since 1st July 2004-17th Aug 2004


Actually speaking, rupee is under severe demand pressure since the start of current fiscal year and has lost around 1.40 percent so far. The rupee has been suffering with a weakening trend in the local currency market, both in the inter bank and the kerb, but its pressure seems to be more intense in the official market. Mainly the importers, oil companies are buying dollars in heavy volumes from the banks while the commercial importers are doing forward booking. Both these segments of the market has constituted very heavy demand thus making rupee to depreciate at a fast pace. According to the bankers, the high demand of currency is putting a lot of pressure on the national currency and the same trend is expected to continue in the coming days as well.

The bankers have chalked out three major reasons for rupee’s 1.4% loss this fiscal year so far including;

• Oil payments demand in advance by oil companies,
• Rising international oil prices and
• Exporters holding back their proceeds to gain higher profits.


The bankers said the federal government has announced to pre-pay another $1 billion loans owed to multi-lateral donors by December, which would also increase dollar demand. They further added that there are a number of other payments, which are in the pipeline, and that banks have been requesting companies to delay these payments.

According to one source, more or less, speculative buying of dollar was taking place from the importers since few days with the risk that rupee is going to depreciate further in the coming days and this is one of the most significant factor in rupee’s fall in country’s official market. Pakistan's trade deficit soared to $3.2 billion, more than three times the 2002-03 deficits of $1 billion. The most important element in this huge trade deficit was that half of it had accumulated in the last quarter thus resulting in a 0.61 paisa loss in the price of rupee during April-June 2004. the falling trend of the national currency continued and dollar went on getting stronger when the trade deficit reached $189 million in July. At this stage, the market was anticipating it to be much higher, keeping in mind the average monthly deficit of more than half a billion dollars in April-June 2004.

This anticipation actually forced the importers to make forward dollar buying to avoid exchange rate loss. At the same time, the monetary policy statement of the State Bank issued on July 21 indicated clearly that the rupee might remain under pressure in July-December 2004. The policy further revealed that during July-May 2003-04, the overall balance of payments surplus had fallen by 70.7 strengthened importers' view that it was time for them to purchase forward dollars to avoid exchange rate loss in future. To add further, the trade policy for 2004-05 issued by the ministry of commerce on July 22 also made it clear that achieving the policy objectives would depend, among other things, on "competitive exchange rates" and thus the importers to do some forward buying to avoid losses in the future.

However, the active movement of SBP by taking certain actions is clear evidence that the central bank wants to maintain stability in the value of rupee even in case of severe demand and heavy repayment schedules. The main point of concern for the State Bank is to keep the value of rupee under the psychological level of Rs. 59/00 and for this reason; SBP has been doing regular intervention and mopping up excess liquidity from the market. This is necessary for the country as a whole since if rupee is allowed to depreciate at such a fast pace, it would not only increase the cost of imports and external debt servicing in terms of rupees, but would also fuel imported inflation over medium term. Not only this, it would also provide incentive for dollarization of bank deposits and shift some investment from the stock market to those areas of economy that lack proper documentation like the real estate. However, another source identified last week that the bankers are of the view that rupee would continue to depreciate at a rapid pace and is likely to fall below Rs. 62/- mark by the end of this year. The report defended its statement by saying that this price value will be backed by increased demand from the oil importing companies and the government’s plans to retire $1 billion expensive loans ahead of schedule.

On the other hand, the banking system of the country continues to face excess liquidity and thus the SBP once again is set to suck in the same in yet another open market operation on 18th August. The State Bank of Pakistan (SBP) has given a pre-auction target of Rs 35 billion for the sale of six-month Treasury bills at a regular auction. The market is stated to be in surplus to the tune of Rs7-8 billion and thus an action is necessary. The State Bank conducted an open market operation on 10th of August, and sold Treasury bills under one-week and two-week repurchase agreement. The bank raised Rs3.175 billion at 1.25 per cent through repo sale of the TBs - Rs3 billion for one-week and Rs175 million for two-weeks - against the total demand of Rs6.425 billion by the banks. For tomorrow’s auction, the bankers are saying that there is no maturity against the auction but treasury bills worth Rs 35.75 billion would be matured this week from previous open market operations. They further said the central bank is likely to raise slightly cut-off yield on the six-month to control rising inflation in the country.

And finally a good news! Pakistan is considering allowing national commercial banks to open their branches in India. According to a news source, it was decided rather hinted in last week’s trade talks, which were part of the ongoing composite dialogue between Pakistan and India. The sources identified that since the developing relations between India and Pakistan especially in the last few months can be a green signal to the Pakistani banks as well to start their operations. Opening up bank branches across borders was found to be a way to enhance trade and economic cooperation between the two countries, sources added.


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